The Italian government has decided to pursue an expansionary fiscal policy, with increased welfare spending as its focus. This column uses evidence from the 2010-2012 sovereign debt crisis to explore the potential negative effects of this policy on private investment. It finds that an increase in a bank’s credit default swap spreads leads to lower investment and employment for younger and smaller firms and in the aggregate. These findings suggest the planned fiscal expansion could substantially crowd out private investment.

The landscape of the fiscal policy debate has changed over the past decade, with academics and international organisations moving away from an ‘Old View’ of fiscal policy as ineffective. This column uses examples from the US and Europe to highlight the five principles of a ‘New View’ of fiscal policy, which increasingly appreciates that expansionary fiscal policy is effective in a world of persistently low interest rates, low growth, and strong international linkages.

Since the beginning of the Global Crisis, the ECB has faced a sequence of problems. This column discusses some of these problems. It also highlights the successful first reaction of the ECB to the crisis and its adequate monetary policies. There are still unresolved structural problems in the Eurozone, however. Among them are the lack of a proper banking union and the need for a better fiscal policy coordination. And the job for such a change within the Eurozone cannot be delegated to the ECB.

In a recent column, the authors suggested coordinating monetary and fiscal expansions in the Eurozone through a money-financed temporary tax cut. The effectiveness of their proposal, however, has been questioned. In this column, the authors address some of the criticisms. They argue that the counter-cyclical fiscal policies adopted by the US and the UK, together with monetary easing, had a stabilising effect on output. Moral hazard due to the more lax monetary and fiscal policies is avoidable, increasing the credibility of the future spending cuts.

With nominal interest rates in many western countries at or approaching the zero lower bound, economists are calling for more quantitative easing or greater fiscal expansions to generate inflation, reduce real interest rates, and rejuvenate the economy. But what if these policies fail? Or are no longer possible? This column outlines a third way: supply-side policies.

The causes and consequences of the current global crisis have been compared with the Great Depression as well as crises in emerging markets. This column argues that the main difference between emerging market crises and the global crisis is that the former relied on an export recovery while the recent recovery has been fuelled by far less sustainable government expenditure.